Not The Minsky Moment You Are Looking For
By Michael Every of Rabobank
Bloomberg notes US firms are embracing higher prices even if it means sacrificing volumes; the White House says US airlines must compensate for delayed or cancelled flights, which will make flying more expensive; a Financial Times op-ed argues no firm should have more than 25% of any market, and no country rely on any other for more than 25% of imports or exports, to tackle monopoly power and geopolitical vulnerabilities driving inflation; the EU says it will sanction some Chinese firms supporting Russia, which China says will trigger a response in kind; China started an anti-spying crack-down on foreign consultants; Canada kicked out a Chinese diplomat for allegedly planning to intimidate a politician; Brazil announced a friend of President Lula, who wants lower rates and doesn’t want to trade in the US dollar, will head its central bank – backing the buck; and it was shown that the EU has dramatically reduced its enforcement of its internal level playing field, with protectionism rising, potentially risking its key achievement. To cap it all off, Noah Smith argues why the US must fight the economic Cold War 2 even if requires an enormous shift in priorities and resources.
Against this turbulent, structurally inflationary backdrop some in markets look like Wile E. Coyote holding up a sign with the word “TRANSITORY!” on it, rather than “HELP!”; others are running off a high cliff while chasing the Road Runner going “beeps beeps!”
On which, the Fed is warning of a credit crunch risk after the recent US banking turmoil. Vice-Chair Goolsbee, a dove, says that he is looking at data and credit conditions. The Fed’s bi-annual Financial Stability Report warns of the same tail risk: you would have to be blind not to see it.
Yet the Senior Loan Officer Opinion Survey on Bank Lending Practices released yesterday was more nuanced than some dramatic headlines suggest. Q1 saw bank respondents report tighter standards and weaker demand for commercial and industrial loans to all firms; and for commercial real estate loans; and residential real estate loans except GSE-eligible and government residential mortgages, which are the majority; and for home equity lines of credit; and for all consumer loan categories except credit cards. Banks widely reported expecting to tighten their lending standards over the rest of the year – and one can assume demand for loans will weaken further too. Yet none of the numbers in the data tables showed a spike in tightening credit or a collapse in demand, just moderate shifts.
Yes, we need to keep an eye on this area: but so far it looks to be what the Fed would want to see after having hiked rates to 5.25%. Indeed, some even think the Fed is happy to outsource tightening to banks to prevent having to hike to 6 or 7%, now that outsourcing of supply chains is not what it once was.
Meanwhile, Chinese bank stocks are soaring as Bloomberg reports a “trading frenzy” underway on a “tide of optimism not seen since the nation’s 2015 equity bubble” as traders bet Beijing will let state-owned firms have access to more capital and play a bigger role, despite them previously being seen as the least efficient users of capital. In which case, if the US is indeed to fight Cold War 2, and if its banking sector does wobble, wait and see how enthusiastically markets react when we get some form of US mirroring of these Chinese actions, as D.C. has in other areas so far.
In short, we aren’t yet at a Minsky Moment, despite headline claims to that effect; which as I pointed out to a friend yesterday, come from people who haven’t ever read any Minsky. After all, if one takes the extreme physical and intellectual effort (for a market analyst) to Google ‘Minsky’ one sees that his economic influences were:
Henry Simons, who supported abolishing fractional reserve banking;
Karl Marx, who spoke of “fictitious” vs. “productive” capital, as China does today;
Joseph Schumpeter, whom we lazily associate with “creative destruction” rather than his sweeping economic history and latter views on Quadragesimo anno and the ‘common good’;
Wassily Leontief, who underlined the paradoxes of international trade theory;
Michał Kalecki, who called negative rates in 1943 if capitalists don’t recycle profits into productive investment or wages;
John Maynard Keynes, who said in the 1930s: “The decadent international but individualistic capitalism, in the hands of which we found ourselves after the War, is not a success. It is not intelligent, it is not beautiful, it is not just, it is not virtuous - and it doesn't deliver the goods. In short, we dislike it, and we are beginning to despise it.” Which sounds like the ‘New Washington Consensus’ just offered by the White House;
Irving Fisher, who knew a thing or two about the stupidity of asset bubbles; and
Abba Lerner, one of the intellectual founders of MMT.
Do you think many market participants have any knowledge of any of this easily accessible knowledge, or are they just going “beeps beeps!”?
Take all of the above views together with the news and opinion-flow I started this Daily with and consider what the real tipping point is. It’s the neoliberal global architecture, in one form or another. However you think markets work, you are likely wrong if more of that architecture crumbles ahead.
So, yes, we are close to a ‘Minsky Moment’ of sorts, I suppose. Just not the kind those hoping for imminent Fed pivots are looking for.